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Does Conn's Deserve Credit?

Conn's is doing well on the sales front, but will credit challenges derail its prospects?

Electronics retailer Conn's (NASDAQ:CONN) just reported another solid quarter of sales and earnings gains. The company has a few more moving parts than a number of larger archrivals, but a regional focus and extension of credit to its customers could be considered key competitive advantages -- as long as current credit challenges subside.

Second-quarter sales advanced 9.4%, while a 32.1% increase in "finance charges and other" contributed to an overall revenue gain of almost 12%. So while Conn's sells everything from home appliances to consumer electronics to furniture, it also offers customers an in-house financing option. The earnings press release stated that the added business segment accounted for about 13% of total revenue for the quarter.

Electronics giant Best Buy (NYSE:BBY) also offers customers credit options, although it outsources the financial implications to an outside bank. And rival Circuit City (NYSE:CC) partners with JPMorgan Chase, meaning that Conn's is unique in the industry by choosing to keep its credit operations in house.

Big-box behemoth Target (NYSE:TGT) also runs its credit operations internally, and like Conn's, it is a big contributor to overall profitability. Conn's is somewhat unique in that it also securitizes its credit card receivables, "from which the company derives servicing fee income and interest income." With all the current credit turmoil thanks to subprime mortgage woes, analysts asked a number of credit questions during the earnings conference call.

Management said there appear to be some challenges in securitizing credit card receivables, and the inability to sell off receivables means Conn's has to make up the difference by using its own capital. However, it stated it doesn't expect any impact to earnings, has plenty of liquidity to ride out any near-term difficulties, and doesn't have to be in a hurry to act in a tough current environment.

Credit concerns could be the reason Conn's stock is down more than 10% today, because the company beat analysts' sales projections and met the earnings consensus figure. Management also confirmed full-year earnings guidance of $1.75-$1.85 as it fills out the store base in its primary markets of Louisiana and Texas, and it looks like it is being conservative to leave wiggle room should credit problems increase as the year progresses.

Conn's is in the early stages of entering Oklahoma, and with only 63 stores, has plenty of room to expand. Any company with credit exposure is being subjected to increased scrutiny these days, but overall it appears that Conn's is being forthright in explaining how it does business, and net charge-offs are well within historical averages. Plus, Conn's financing arm could be worth the trouble, because companies that try to beat Best Buy at its own game are increasingly falling by the wayside.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.